Meet Maryanne Ingemanson. The 77-year-old widow, now living on the shores of Lake Tahoe, made a small fortune in California real estate. Drawing upon the expertise of an estate-planning attorney, she has set up a complex tax shelter utilizing life insurance that potentially will save her and her heirs millions of dollars in taxes.
As the Wall Street Journal explains it in a Monday article, Ingemanson moved 90% of her net worth into a "dynasty trust." A key element is a $20 million policy on the lives of her and her deceased husband, which pays out when both are dead. The tax shelter taps an tax exemption for life insurance dating back to 1913 when Congress instituted the income tax. The income generated by the insurance policy is not taxable while Ingemanson is alive, and the proceeds from policy are not taxable upon her death.
"It is very satisfying to know that everything you've worked for all your life isn't going to be swept away" in a generation or two by taxes, Ingemanson told the WSJ.
The larger point of the WSJ story is that life insurance policies are increasingly becoming an investment vehicle of the wealthy. Middle-class Americans are shifting from whole-life or universal life policies toward term life insurance, which pays only death benefits. Meanwhile, the Journal states, "an increasing portion of insurers' business consists of selling large policies to wealthier Americans, often as part of complex estate-tax plans." A growing percentage of tax benefits -- estimated to cost $265 billion over the next 10 years -- is going to the rich.
Class warriors, please take note. While you press for higher tax brackets on high-income Americans -- most recently in the controversy over whether or not to let the George Bush tax cuts to expire at the end of the year -- you remain oblivious to the fact that the wealthy have far more options than middle-class Americans do to protect their income and their wealth. You will not reap nearly as much money from the higher tax bracket as you think you will. But you will push trillions of dollars of wealth into tax shelters, at some cost to the nation's economic vitality.
Already, even under the current tax regime, policies for $2 million and up comprise 40% of the face value of new whole-life and universal-life policies, the Journal reports. Of all assets accumulating tax-free in whole-life and universal-life policies, 22% belong to the wealthiest 1% of families in the U.S.; 55% are held by the wealthiest 10% of families. Families in the bottom half of the income curve owned only 6.5%. That's especially ironic considering that life insurance originated as a market-based means by which middle-class Americans could create their own social safety net. It was for that very reason that Congress exempted income from insurance policies from the federal income tax in 1913.
But things have changed. Americans now have an extensive government-financed safety net to fall back upon: Social Security, Medicare, Medicaid, disability insurance, food stamps and low-cost housing among others. No one needs insurance to avoid destitution anymore. Why bother to insure against disaster when the government will take care of you? Sales of life insurance policies to households with children have fallen 45% since 1985, even as the number of such families has increased by 26%.
Liberals and progressives rail against the injustice of increasing inequalities in the distribution of income, but they cling to self-defeating policies such as raising rates on the rich as a supposed remedy. Earth to liberals: Higher tax rates encourage the rich to shelter more of their income. Instead of raising tax rates, which punishes not only the rich but the upwardly mobile, why not close loopholes like tax breaks for vacation homes and exemptions for life insurance?
Sadly, in the land of the rent seekers, Washington, D.C., the rule of the special interests prevail. The life insurance industry will defend its special exemption to the death.